NEED versus GREED

One day Colonel Sridhar asked me a very innocuous question, “I have to pay an installment for  my house. When should I sell my mutual fund (MF) holdings?” I could not tell him that he had made a major staff duties (SD) mistake. He had made a fundamental flaw of financing his Need from Greed. Let me explain this for the novice.

The common investor  needs to be clear about two aspects of finance which affect our personal lives. We all have essential needs eg child’s education, first Car, marriage of a daughter, purchase of a house, etc. These needs require a major financial outgo and the expense is time bound, non-delayable. Such NEED should be financed from debt instruments. Allocate that money and put it in Defence Services Officers Provident Fund(DSOPF), Personal Provident Fund(PPF), National Savings Certificate(NSC),  Bank Fixed Deposits (FD), Bonds or Bullion. The financial needs cannot be postponed. If you put this money in share market, real estate, you have to be extremely lucky to make money and survive. The markets have a habit of tanking downwards exactly at the time when you require the money. Go and ask some of the veterans. They thought that they could earn a quick buck in the stock markets in six to eight months, so they withdrew money from DSOPF to pay a housing installment, then got greedy,  punted on the stock market and came out with their shirts lost or net worth eroded and ego bruised.

Greed, as the name implies is earning more than what is the long term bank rate. Any such return has an element of risk attached to it, be it chit funds, business,  stock markets, plantation companies, real estate or any other such venture. Because of the risk, the returns can be higher or “lesser” than the bank/DSOPF. The GREED component of your requirements imply activities like upgrading your car to a Mercedes, buying an SUV, going on a foreign holiday, buying a Cartier watch for your wife or a Prada suit for your girl friend. These requirements are not time specific. You can delay your buy decision (unless of course the girl friend threatens to find a better suitor) and such assets or life style experiences be bought from high return, risky instruments like stocks and real estate.

So, my answer to Sridhar was, “Now that you have made a major SD mistake, just sell on a day when the markets  are gaining and the closing NAV of your MF units is higher.”

All of us are literate. Not many of us are financially literate. The two major emotions which all “faujis” know are Fight and Flight. These emotions govern the financial world, too. Next time, I will write about that. Till then reassess your finances and do the basic allocation correctly.